Randy Hunt, local CPA and 5th Barnstable District Massachusetts state representative, regularly posts his points of view regarding local, regional and national issues. (Boring!) But most of the time he just writes humorous stories. No ads. No clutter. Everything is copyrighted by Randy Hunt. To replicate an article, just email for permission.

Tuesday, September 30, 2008

To tax or not to tax, that is the Question 1

Are the voters of Massachusetts going to pull a “David Copperfield” on Tuesday, November 4th by making the state income tax go poof? The last attempt at this in 2002 nearly passed with 45.3% of voters saying “abracadabra.”

My purpose with this blog entry is to inform rather than take a side on this controversial question. (Of course, I’ll never be able to accomplish that. You are hereby forewarned.) First, let’s take a look at the Question as it will appear on the ballot:

QUESTION 1: Law Proposed by Initiative Petition

State Personal Income Tax

Do you approve of a law summarized below, on which no vote was taken by the Senate or the House of Representatives before May 6, 2008?

This proposed law would reduce the state personal income tax rate to 2.65% for all categories of taxable income for the tax year beginning on or after January 1, 2009, and would eliminate the tax for all tax years beginning on or after January 1, 2010.

The personal income tax applies to income received or gain realized by individuals and married couples, by estates of deceased persons, by certain trustees and other fiduciaries, by persons who are partners in and receive income from partnerships, by corporate trusts, and by persons who receive income as shareholders of “S corporations” as defined under federal tax law. The proposed law would not affect the tax due on income or gain realized in a tax year beginning before January 1, 2009.

The proposed law states that if any of its parts were declared invalid, the other parts would stay in effect.

IN FAVOR: “41% waste in Massachusetts state government,” reveals survey. Eliminating government waste is one reason to vote “Yes.”

Your “Yes” vote cuts your state income taxes 50% starting this January 1st – and eliminates the last 50% next January 1st. For you and for 3,400,000 Massachusetts workers and taxpayers.

Your “Yes” vote gives back $3,700 each to 3,400,000 Massachusetts workers and taxpayers – including you – on average when we end the state income tax. $3,700. Each worker. Every year.

Your “Yes” vote will create hundreds of thousands of new Massachusetts jobs.

Your “Yes” vote will NOT raise your property taxes NOR any other taxes.

Your “Yes” vote will NOT cut, NOR require cuts, of any essential government services.

Your “Yes” vote rolls back state government spending 27% - $47.3 billion to $34.7 billion – more than state government spending in 1999.

Let’s take a look at some of the arguments for and against Question 1:

FOR: 41% of revenue coming into the state’s coffers is wasted.This is clearly an opinion which evolved from a survey. One man’s garbage is another man’s treasure, they say.

FOR: Save $3,700 a year.Sounds good, but does anyone believe that the state legislature will simply cut huge swaths out of the budget and skip merrily along to the next challenge? No, the efforts would focus on replacing the lost income with other tax and fee increases. Perhaps even by adopting a new version of the income tax with a different name. “Meet the new boss. Same as the old boss.”

FOR: Hundreds of thousands of new jobs just waiting to be filled.That’s good because quite a few of the 68,000 state workers and 95,000 county, city and town workers will be looking for new gigs.

FOR: Voting “Yes” won’t cut any essential government services.I suppose that depends on your definition of essential. To be fair, Question 1 slashes the income tax in half for one year and then eliminates it completely starting in 2010. So we’ll theoretically have a year to prepare for the next wave of cost cutting. I say “theoretically” because we all know the real effort will be on generating new fees and taxes.

AGAINST: Passing Question 1 will slash 40% of the state’s revenues.I’m not sure why this is an argument against Question 1. Sounds like Carla Howell could have used this on her side of the ledger. I find it interesting that the proponents say they’re reducing revenues by 27% (from $47.3 billion), whereas the opponents say it’s 40% (from $27.9 billion). Can’t we even agree on what the state budget is?

AGAINST: It would force dramatic cuts in local aid.No doubt this is true. For a second, let’s imagine that the state actually found a way to get along on the Howell Diet, but in order to do so, all local aid was eliminated. (This, by the way, can’t happen, especially in relation to education funding, but work with me here.) Taking the Town of Sandwich as an example, about $10 million of its revenues come from the state’s local aid package. To replace that lost income with property tax revenue, the average home, which is assessed at $427,000, would have to be taxed an additional $840. Considering that the median income earner in Sandwich, at $66,000, would save about $3,300 in income taxes, I’d say that’s a pretty good swap. Even if you earn half that, you’re still ahead of the game.

AGAINST: It would force drastic cuts to education and public safety funding.See prior paragraph.

AGAINST: It could force the state to raise other taxes and fees.That’s an honest observation. Based on the state’s inability to just say “no,” the word “could” in this bullet point should be changed to “would.” We all know that.

But is it a foregone conclusion that there is only one way to manage this behemoth? It would seem so by the way the status quo lovers (Squols) are reacting. Let’s look at a state that manages a budget that’s about 50% bigger for a population almost four times larger.

Texas convenes its legislature on the second Tuesday of January in odd-numbered years. That’s right. Every other year. And for a constitutionally mandated maximum of 140 days. The governor holds the unique power to call a special session, which is limited to 30 days. Think about it. Only 140 days every other year to pass a biennial budget and to do all those other things legislators do. How badly can they screw things up in 140 days? Don’t answer that.

For the 23.5 million Texas residents, there are 150 representatives and 31 senators in the state house. In Massachusetts, we have 160 reps and 40 senators for 6.4 million residents. Yes, I know that we already cut back from 240 representatives in 1978. A step in the right direction, for sure.

Here’s another step in the right direction. Texas state legislators earn a cool $7,200 per year. I know what you’re thinking. They’re getting paid in even-numbered years? What a hack-o-rama they’re running down there. Keep in mind that state reps and senators spend that in-between time delivering constituent services (and dreaming up new laws they think they can fast track in 140 days).

Income tax? Along with Alaska, Florida, Nevada, South Dakota, Washington and Wyoming, Texas has no income tax. (New Hampshire and Tennessee, by the way, tax only interest and dividends.) Predictably, the Squols immediately point to high sales and property taxes in states with no income tax.

And yes, sales taxes in Texas are higher. Most cities tack on 1.5% to the state’s 6.25% and counties up that by an additional 0.5%, totaling 8.25%. One argument often made for a national sales tax, the Fair Plan for example, is that you have some control over when and how much you pay in taxes. Nonetheless, you must account for an extra 3.25% in higher sales tax. If you’re at the median income I mentioned earlier and you spend $25,000 a year on taxable stuff, that’s an extra $800 or so.

Next, the Squols point to higher property taxes. That intrigued me, so I looked up the house in Texas I grew up in and found that its current assessment is $102,000 and is subject to a whopping tax rate of $2.52 per thousand. Extrapolating that to the median house in Sandwich, assessed at $427,000, you’d pay $1,076 a year.

Before you buy me a ticket to Amarillo, let me state that all things are not equal. Average salaries, home prices and cost of living in general are markedly less down south. And the state is part owner of scads of oil and gas wells, the royalties and working interests from which fund the state’s university system. So I will allow that this is somewhat of an apples and oranges comparison.

My point, however, is that we don’t have to be lashed to the main sail of this fixed rudder schooner if we don’t want to be. It might be unsettling to ponder how we would manage if we turned state government on its head, but we would manage. And, from an historical viewpoint, what better place to do it than Massachusetts?

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About Me

A certified public accountant for 30 years, Randy has his practice in the beautiful, seaside town of Sandwich, Massachusetts.
Active in many local organizations, Randy is the state representative for the Barnstable & Plymouth District and advocates for conservation of Cape Cod, public safety and independence from foreign energy sources.